As of 1 July 2017, substantial changes to the way Aussies use their superannuation funds are due to come into effect.
The clock is ticking on the wide-ranging changes that are likely to affect everyone’s retirement savings says Craig Day, executive manager of FirstTech – Colonial First State.
“It can pay to plan ahead – both to take advantage of the existing rules and to make the most of the new super landscape,” he said.
One of the biggest changes will be the new limits on non-concessional contributions.
“The annual cap on non-concessional, meaning it’s not claimed as a tax deduction, super contributions will be reduced from the current $180,000 to $100,000 a year,” Day explained.
“The bring forward rule, which allows people under 65 to ‘bring forward’ two years’ worth of contributions, will reduce accordingly, from $540,000 in any three-year period to $300,000.”
This mean anyone with a super balance of more than $1.6 million will no longer be allowed to make further non-concessional contributions.
“If you’re planning a large non-concessional contribution you should consider doing so before 30 June,” Day advised.
“This is especially the case for individuals with high super balances. Also, if you have already triggered the bring forward rule either last year or this year but didn’t contribute the full $540,000, you will only have until 30 June to get the balance into super. If you delay beyond that date you may still be able to contribute but the amount you can get in may reduce significantly under some transitional rules.”
While there has been a rumour the three year bring forward rule for after tax (non-concessional) contributions for 2016/17 had changed as well, finance expert Peter Switzer on behalf of the Australian Taxation Office says it’s not true.
He did say however, the bring forward rule will automatically trigger after 1 July if you make non-concessional contributions of more than $180,000 in a year into super.
“Any additional contributions you make before 1 July 2019 will be excess contributions,” Switzer said.
Another major change to the way you manage your super fund will be lower concessional caps – concessional (tax deductible) contributions include employer Super Guarantee payments, salary sacrifice arrangements and personal deductible contributions.
Day explained: “The concessional contributions cap is currently $35,000 if you are aged over 50; $30,000 if you are younger. But from 1 July, the cap will drop to $25,000 for everyone.”
While this may sound like bad news bears, Day says the good news is that as of 1 July, all taxpayers will be allowed to make personal contributions from after-tax money and claim a tax deduction.
“Currently only people who are predominantly self-employed or who have no employment income can do so,” he said.
“People aged 65-74 will, however, still need to meet the work test.”
One of the biggest bummers if you’re not yet over 60 is that earnings on superannuation assets used to pay a transition to retirement (TTR) pension will no longer be tax free.
Day says they’ll now be taxed at the 15 per cent superannuation rate.
“The payments you receive from your TTR pension will continue to be taxed as they are now,” he said.
“That is, payments are tax free if you are aged 60 or over, or taxed at your marginal rate with a 15 per cent tax offset if you are aged 56-59.”
He added that some high-income earners may be worse off using a TTR strategy from 1 July as a result of the income threshold at which individuals begin to pay contributions tax at the higher rate of 30 per cent, instead of the normal super rate of 15 per cent, will be lowered from $300,000 to $250,000.
“If this affects you, you should see your financial adviser to have your TTR pension reviewed. You may be better off turning it off,” Day said.
Finance expert Switzer said while it is true there will be a new $1.6 million pension cap – it’s definitely not true that this transfer balance cap can be shared between couples.
“For example, one member of the couple cannot have $3M in retirement phase and the other member have $200,000,” Switzer said.
Day added that the new cap will apply to all existing and new pension accounts.
“Special rules will also apply where you receive certain non-account based defined benefit pensions, such as a lifetime pension,” Day said.
“If you think you will have more than $1.6 million in your combined pension accounts by June 30 you may need to withdraw the excess amount. You can either shift it back into a super accumulation account where it will be taxed at 15 per cent, or remove it from the super environment entirely.”
Day urged people to seek advice as the best option would really depend on your circumstance as he said the cap also had implications for estate planning.
“If you need to transfer assets back into an accumulation account this could have an impact on your estate planning,” he warned.
“Also, when you die, any income paid out of your super pension to a partner or dependent child will be assessed as part of their $1.6 million pension cap.”
Day offered this final tit bit of advice: “The rules around super and estate planning are complex so you may need to review your estate plan with an adviser. While these are some of the main changes to superannuation that are set to become law on 1 July, there are others that may affect your retirement savings.”
For more information on the superannuation changes visit ato.gov.au/superchanges and definitely contact your financial advisor if you’re unsure.
Read more: The super scam to watch out for.